Bonds: ECB participation in the Eurozone market decreases close to 2020 levels

The reduced activity of the European Central Bank ( ) in the Eurozone state market, following the cessation of reinvesting under the APP quantitative relaxation programme, was quickly covered by other buyers, resulting in its transition to a credit tightening regime becoming smooth and without problems. According to the ECB’s analysis, the ECB’s bond market footprint returns to 2020 levels when it had launched the massive securities markets with the emergency pandemic programme (PEPP). As of mid-2022, the balance sheet of the central bank was reduced by around 2 trillion euros or more than 22%, mainly due to the repayment of loans at zero or negative interest rates received by banks but also the non-investment of the capital from bond maturity. In 2020, the total amount of outstanding euro area government bonds amounted to almost EUR 8 trillion, while the ECB’s markets and the value of the government securities that banks had pawned to receive loans on favourable terms exceeded 3.5 trillion. EUR 31.5% of the market. This rate increased close to 40% in mid-2022, but then began to recede and draws back to 2020 levels, despite the publications – bond records from Eurozone countries. How, however, did the market adapt and which investors covered the gap left by the ECB’s policy change, absorbing increasing government bond issues? The data show that it was foreign investors and households in the Eurozone that contributed mainly to this direction. Foreign investors were traditionally the Eurozone’s largest sovereign bond buyers, with a percentage reaching 40% before the ECB started its bond markets in 2015. Their participation was then reduced to half, to return to higher markets when the central bank’s reinvestments under the APP ceased. The return of foreign investors, mainly investment funds and hedge funds, is explained by the increase in bond yields following the tightening of the ECB’s monetary policy since mid-2022 with the successive increases in its interest rates. The increased contribution of foreign investors was particularly evident in the publication of a Greek 10-year bond at the end of January, amounting to 4 billion euros, when demand reached 35 billion euros. In this development, of course, it contributed that four credit rating agencies – S&P, Fitch, DBRS and Scope – gave the investment step to the Greek economy in the second half of 2023. Today, the share of the Eurozone’s sovereign bond markets by foreign investors is close to 30%, i.e. less than it was a decade ago. Notable is the return of households to bond markets, which were the largest buyers after foreign investors in 2023, with their market share increasing to 3.5%, near the level set before 2015. The increased yields of bonds, combined with the special issues made by Eurozone countries and the slow and limited increase in deposit rates by banks, made state securities attractive to households. Source: RES-AE